It has been about five months since the last update (February 2013) with a bit of activity in the leveraged portfolio. I added to a a number of existing positions along with initiating four new positions.

Since this portfolio is focused on dividend growth stocks, which dividend paying companies increased their distributions since the last update? I’m happy to report that several companies did, particularly the bank stocks. In my portfolio, dividend increases came from:

Common Questions:

Why the high concentration in financials and energy?

With regards to sector allocation, you may notice that this portfolio is fairly concentrated in financials and energy. Note though that this is one of my accounts where I treat all of my accounts as one big portfolio. In other words, my international and other sector equity exposure are in other accounts.

There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio. Over the long term it may be lucrative. However, over the short term, equities are volatile and can put the portfolio deep in the red. My portfolio during 2008 is a prime example of what can happen. If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing. Here is an article I wrote answering a reader question “Should I Start the Smith Manoeuvre?”

Disclaimer: The securities mentioned in this post are not recommendations to buy or sell and should be used for informational purposes only.

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

I agree with the others about the expansion of the portfolio to 39 holdings, and that is only Canadian holdings. If you are picking individual stocks to cover other geographical regions, you must have a total portfolio of 60-100 stocks?

I think you need to serious trim holdings, or possible use alternatives. For example, there is no need to hold all 5 major Canadian banks, not exactly sure what benefit you derive since I”m sure the correlation amongst these 5 is extremely high, maybe 2, or 3 of these at max, or just hold a fund or ETF tracking Canadian financials.

I think one of the major benefits of holding individual stocks is the concentration potential for increased returns over an index. You are also definitely beyond the ‘efficient frontier’ for minimizing risk.

FT, I am curious as to your interest in IDG. It looks like the dividends havent increased in a few years, P/E is about 68, it is near a 52 week high and the payout ratio is over 200%. I am no expert here – am I missing something?

Hi Dan! You are right, it is way too pricy right now. I’d be interested if there was a big sell off. I like that it has a book presence monopoly in Canada. However, I did not notice the high payout ratio, thanks! I will review and likely remove from my watch list.

Just wondering why you don’t concentrate your portfolio a little more to reduce costs and increase your ability to monitor the businesses you own. I’m an investment professional so I get the whole MPT and diversification argument but I think you can (and some research has shown) that you can get very high levels of diversification with as little as 10 or 15 stocks. This would also allow you to allocated more capital to your best ideas and should in theory increase your expected return, both in terms of capital appreciation and income.

Also to add to the comment above – for full disclosure I am employed by one of the companies in your portfolio. That being said the aim of my comment was not to advise you to allocated more of your capital to the company I work for (or advise you in any other way for that matter) but rather to understand your rationale for holding ~40 companies in your portfolio.

@Dan, you are right in that I have too many positions. I plan on consolidating over time, or at least stop adding new positions (at least in Canadian stocks) and only building on existing positions. 10-15 stocks would be uncomfortable for me, I would say ideal is in the 20-25 range.

@Jay, thanks for the kind feedback. I have considered DRIPs, but decided against it as this is a non-registered portfolio, and I would need to track the adjusted cost base every time new shares are purchased. I’d rather collect the cash and choose for myself which shares to buy in bulk.

@Emilio, thanks for the vote of confidence! I’m not qualified to recommend when to buy, but for me, it would be attractive at a yield greater than 4.8%. For example in June it reached 5% before buyers rushed in. However, if you are buying for the long term, you could consider initiating your position now (like 1/3 or 1/2) and buying more if it gets cheaper. Some food for thought!

Maybe I’m missing something here. If someone is starting off using the Smith Maneuver, & invests in a basket of stocks in a nr account, & aims to hold these stocks (ie, never sells), won’t the dividend income inclusion (after taking the dividend tax credit into consideration), basically offset the interest deduction each year? If the portfolio yield is say, 4.5%, & the heloc rate is say 3.5%, don’t the two virtually wash?

@Dan, not quite because dividend taxes are much less (b/c of div tax credit) than taxes on your ordinary income. For example, in Ontario someone making $85k will get a 40% tax rebate off their investment loan interest, but only pay 20% tax on their dividends. Does this make sense?

@FT from what I understand the smith maneuvre relies on 2 things: (1) low interest rates for a HELOC and (2) the div tax credit

so if prime went up from 3% to 5%, then the net yield of the entire portfolio is drastically reduced since the income is made in the spread between the interest rate paid and the net yield of the dividends……is this correct?

The yield of the portfolio wouldn’t change on paper. Normally when you calculate yield you’d use the acquisition cost of the stock since that’s the price you locked in at – not market.

A perceived long term spike in interest rates, and would imply that the risk free rate will increase as well. In most valuation models, that would call for a drop in stock prices. Consequently if you calculared yield vs the new lower market price yield actually goes up.

That being said, two of the risks of the smith maneuver is that interest rates will go up, and either you experience a (paper) capital loss on the portfolio, or the distributions are insufficient to cover the interest obligations of the debt.

@Dan, depending on the province, mathematically speaking, interest rates can be up to 50% greater than the portfolio yield and still break even. However, there are risks, such as the reduction of the dividend tax credit (possible if there are reductions in corporate tax) and if interest rates go through the roof.

@chuck, good analysis. One thing that wasn’t noted is that the interest is capitalized, which means no cash flow out of pocket to pay the interest. The HELOC is used to pay the interest. The HELOC increases a bit at a time, but so does the tax deduction.